This article was published in TRIAL magazine,
October 1998. What should the trial lawyer do when the insurance company wrongly
accuses its own customer of claim fraud?
Combating the Fraud
Let's face it - insurance litigation gets
tougher every day. The law says insurers have the burden of proving
claim fraud, yet many jurors presume that greed motivates the insured
Jurors fret about their escalating premiums, while
defense lawyers play the role of the consumer's best friend. Insureds
must try to win coverage in a hostile environment. How can counsel
combat the fraud defense?
The trial lawyer's counterattack begins by
establishing clear rules for the battle. Counsel must screen out
fraudulent claims by learning how to recognize the red flags that
attract insurer attention: the unwitnessed slip and fall, for example,
or the business that burned a week before foreclosure. These claims are
perfectly consistent with innocence but may also indicate fraud.
Counsel must also beware of claims referred by
third parties, even those who don't directly ask for anything. Clients
who do not speak English are often accompanied by translators or
advisers who present the case to counsel. These people can market
fraudulent claims, charging counsel for translation services and taking
a cut from the claimant at settlement. Also suspicious are advisers who
want to be named on settlement checks "to help cash the
Paralegals or associates involved in client intake
must be educated about fraud. Red flags should trigger close questioning
of potential clients. If the client was previously represented by
another lawyer, what happened to the relationship? How did the client
If the claim seems suspicious at the initial
interview, what will it look like after a year or two in discovery?
Of course, even valid claims may send out red
flags. After any questions about a claim's validity have been resolved,
counsel must be prepared to handle requests for documents, statements,
medical exams, or examinations under oath. Counsel should be diligent
considering these requests. An unsuccessful attempt to stonewall on
policy requirements can be fatal to the claim.
Prevent unnecessary policy defenses
If the insurer suspects fraud, it will demand full
compliance with the policy. Insureds have significant duties in first
party claims. These duties are found in the "ConditionsDuties
After Loss" section of the policy and go well beyond a general
requirement to cooperate.
The policy probably requires the insured to
furnish books and records, to exhibit damaged property, to supply proofs
of loss within a particular time, to supply medical and wage
information, to submit to an examination under oath, and to refrain from
filing a lawsuit before fulfilling the policy requirements. Property
policies often feature a one-year limit for filing suit.
Ignoring or resisting these requirements can
create defenses for the insurer. In a recent case, the insured refused
to submit to an examination under oath, claiming the request was
unreasonable because he had already submitted to two recorded
statements. Defendant insurer argued that the policy required submission
as a matter of law and the insured's refusal justified dismissal. The
court agreed and upheld dismissal.1
Sometimes the issue isn't so clear. For example,
the policy usually requires the insured to supply records and documents
for inspection. Absent an express condition, must the insured sign a
blanket authorization for financial records? Does the general
cooperation clause (often found outside the "Duties After
Loss" section) compel the insured to do whatever the carrier wants?
In the personal injury protection (PIP), no-fault
medical, or underinsured motorist context, the requirement to provide
medical access and information can create issues. Can the required
medical authorization be limited to the subject of the injury?
If the PIP form allows the carrier to require a
medical examination, can the carrier obtain a psychiatric one?
In every instance, the policyholder can reject
unreasonable demands, yet if the court later supports the insurer's
request, the insured can lose coverage. Even if the policy does not
clearly support the carrier's request, case law interpreting the policy
may mandate compliance. Refusal to comply, no matter how unreasonable
the request may seem, can endanger the claim.
To resolve these disputes, counsel should look
beyond the issue of the moment. When suit is filed, the insurer may get
what it wants in discovery anyway. If so, furnishing the requested
information early may help resolve the case. Unless the insurer's
request is totally unreasonable, voluntary compliance will likely help
the cause at trial.
Another approach is to put the burden of decision
on the company. If the company wants a financial records authorization,
for example, counsel should ask the adjuster to explain the basis for
the request in the policy or in law. Counsel should express willingness
to compromise, to help the insurer obtain relevant information by other
means, and to keep an open mind and consider the company's position.
This should be done in writing, with a letter that will make an
effective exhibit at trial.
Policy requirements do not lend themselves to a
"just say no" approach. If the insurer adds a policy-violation
defense to a fraud defense, the consumer has problems. Juries often
suspect outright fraud but believe the carrier failed to prove it. A
policy violation gives the jury an excuse to find for the carrier.
Discover key facts
Insurers can use an ongoing investigation to
justify delay. Most states' unfair claims practices acts require the
insurer to complete its investigation within 30 days of notice.
Typically, the insurer can then notify the insured that more time is
needed and investigate further.
If the claim isn't paid within four or five
months, the situation changes dramatically. The insurer refuses to
accept or deny the claim. Delay begins to grind on the insureds,
draining personal and financial resources, exhausting their emotions,
and compromising the evidence. Personal relationships suffer, as
insureds blame each other for the insurance company's intransigence.
Filing suit for coverage and bad faith is often the only way to ensure
that the claim will be resolved.
Interrogatories can require the carrier to
identify the basis for its denial and to state each fact on which the
denial is based. Counsel should ask for the source of each fact relied
on, every supporting document, and the identity of every witness.
Complete claim files should be requested
immediately. Many companies have multiple files at different levels of
supervision for the same claim. There may even be separate investigation
files. Requests for production must be directed at all such files.
Carriers often resist discovery of claim files, so counsel must be ready
to ask the court for relief.2 The mental impressions, conclusions, and
opinions of an insurer's representatives are discoverable. The Arizona
Supreme Court reasoned:
The claim file contains a
"blow-by-blow" diary of the insurer's investigation and
decision-making process. . . . No matter how the test is defined, bad
faith is a question of reasonableness under the circumstances. . . .
The portions of the claims file which explained how the company
processed and considered [the plaintiff's] claim and why it rejected
the claim are certainly relevant to these issues. Further, bad-faith
actions against an insurer, like actions by client against attorney,
patient against doctor, can only be proved by showing exactly how the
company processed the claim, how thoroughly it was considered and why
the company took the action it did.3
Counsel should beware of incomplete production.
The carrier may produce what purports to be the claim file but no list
of withheld documents. A privilege log listing each document withheld
and the basis for nonproduction should be requested, along with a demand
that electronic communications be printed and produced.
The claim file should be checked to ensure it is
internally consistent-that there are answers included with all
communications and that a record of informal activity (the adjuster
diary or activity log) is complete. Where there is cause for suspicion,
counsel should note a Rule 30(b)6 deposition of someone familiar with
After the results of initial discovery are in
hand, counsel can start to choose appropriate weapons. Remember, the
carrier, not the insured, bears the burden of proving the fraud defense.
Use summary judgment
The initial discovery is like a bill of particulars. Once it becomes
clear what the carrier is alleging and how it intends to prove it,
counsel should go through the allegations and focus on removing the
weakest. This is crucial, because each unfounded allegation of fraud
needs to be handled before trial or it will drain attention from the
real issues. Counsel should consider bringing a summary judgment motion
to deal with fraud allegations.
Burden of proof is the touchstone for developing strategy. Most cases
hold the insured need prove only that the policy was in effect on the
date of loss and that the peril was within the policy's coverage. Fraud
is an affirmative defense the insurer must plead and prove.4
If, for example, the insurer claims the policyholder intentionally
inflated the claim, the insurer must prove intent. The insured may have
made an error in evaluation, or the dispute may be simply a clash of
opinions. In either case, a quick motion for summary judgment should get
rid of the defense. Striking even frivolous fraud defenses can help
settle the claim-especially when the adjuster initially thought the
defense had merit.
Summary judgment motions are particularly useful where the insurer
claims fraud by arson. In recent years, companies have been pleading
this defense at every opportunity. Often, the carrier uses the defense
when it doesn't know precisely where or how the fire started. Absent
clear evidence of accidental origin, the carrier simply assumes the
insured burned the property. These assumptions will seldom survive
summary judgment, particularly where motive is unclear.
In one case, the insured homeowners sued on their claim after a house
fire, and the insurer counterclaimed for fraud, alleging owner arson.5
The insureds moved for summary judgment, supported by the husband's
affidavit that stated, "I did not have anything to do with causing
the fire, nor did I pay anyone or request anyone to set the fire."6
The trial court granted judgment for the insured, and the insurer
Affirming, the appellate court said the affidavit shifted the burden of
proof to the insurance company to present substantial evidence on the
arson issue. To establish a prima facie case of arson, the insurer must
prove (1) the fire was intentionally set; (2) the insured had a motive
to burn the home; and (3) the insured either set the fire or had it set,
which may be proved by circumstantial evidence implicating the insured.
Here, the insurer failed to meet its burden, and summary judgment for
the insured was proper.7
Trial lawyers accustomed to representing plaintiffs often neglect
summary judgment, the defense bar's best friend. If a fraud defense is
based on mere suspicion, or the circumstantial evidence is less than
compelling, counsel should move for summary judgment to try to resolve
Divide and conquer
Sometimes the carrier is half right. An insured burned the house,
crashed the car on purpose, or otherwise violated the policy. Another
insured, such as a spouse or business partner, may be completely
innocent. Innocent co-insureds may bear the loss if coverage is
The divorcing spouse who burns the family home can impoverish the
innocent spouse if fraud by any insured forfeits coverage for all.
Recent developments in the law help those who have been victimized
twice-first by the insured wrongdoer and then by the insurer who refuses
to cover the innocent co-insured.
A growing body of case law now recognizes that co-insureds have rights
independent of each other and that a policy violation by one insured may
not void the policy as to the other. As one court summarized:
The minority view . . . previously the majority view, denies an innocent
spouse recovery either because the underlying property ownership is an
indivisible tenancy by the entirety, or because the wrongdoing of one
spouse is imputed to the other under a theory of oneness of the married
couple. The present majority view . . . allows an innocent or divorced
spouse to recover even though the co-insured spouse is at fault. The
majority view courts reason that policy language excluding coverage must
be explicit or that what is in question is the spouse's interest in the
insurance policy, not the interest in the real property, or that the
fault of the wrongdoing spouse cannot be imputed to the innocent
Many modern cases favor innocent co-insureds. Courts have protected them
by saying that their rights and obligations under the policy are
severable. This argument is based on the language of the New York
Standard Fire Policy, which provides:
Concealment, fraud. This entire policy shall be void if, whether before
or after a loss, the insured has wilfully concealed or misrepresented
any material fact or circumstance concerning this insurance or the
subject thereof, or the interest of the insured therein, or in case of
any fraud or false swearing by the insured relating thereto.
Courts have reasoned that policies speak of fraud or misrepresentation
by "the insured." Thus, the antifraud provision must mean
"the insured who violated the policy has no coverage."9 If the
rights and obligations under the policy are severable rather than joint,
a co-insured who does not participate in the policy violation is
Insurance companies have countered with new policy language that voids
coverage on fraud by "any insured." Many courts held carriers
could thus eliminate claims of innocent co-insureds.10
Those opinions, however, overlooked that most states require carriers to
use the New York Standard Fire Policy language or other, equally
liberal, language.11 Thus, even if the policy says that fraud by
"any insured" voids coverage, the court will look to the
language of the Standard Policy and hold coverage is voided only as to
"the insured" who committed the fraud. Most modern courts
presented with the Standard Policy argument have protected the innocent
Trial lawyers can win tough cases by paying close attention to the law,
understanding the policy, and narrowing issues before trial. These
techniques can combat the fraud defense and force insurers to pay valid
claims. Solid investigation and sound research can keep fraudulent
claims out of the office and ensure compensation for deserving
1. Downie v. State Farm Fire & Cas. Co., 929 P.2d 484, 485 (Wash.
Ct. App.), review denied, 939 P.2d 215 (Wash. 1997); see also United
States Fidelity & Guar. Co. v. Wigginton, 964 F.2d 487, 490 (5th
Cir. 1992) (requiring exam under oath even where insured was involved in
related criminal proceeding); Archie v. State Farm Fire & Cas.
813 F. Supp. 1208, 1213 (S.D. Miss. 1992) (offering to submit to
examination nine months late was insufficient).
2. Leading cases include Brown v. Superior Court, 670 P.2d 725 (Ariz.
1983); In re Bergeson, 112 F.R.D. 692 (D. Mont. 1986).
3. Brown, 670 P.2d 725, 734.
4. See, e.g., Travelers Indem. Co. v. Lee, 204 So. 2d 759 (Fla. Dist.
Ct. App. 1967); Pacific Ins. Co. v. Frank, 452 P.2d 794 (Okla. 1969);
Hendrix v. Insurance Co. of N. Am., 675 S.W.2d 476 (Tenn. Ct. App.
1984); Dairy Queen, Inc. v. Travelers Indem. Co., 748 P.2d 1169 (Alaska
1988); S & W Properties v. American Motorists Ins. Co., 668 So. 2d
529 (Ala. 1995).
5. Pennsylvania Nat'l Mut. Cas. Ins. Co. v. Lane, 656 So. 2d 371 (Ala.
6. Id. at 373.
7. Id. at 376.
8. Commercial Union Ins. Co. v. State Farm Fire & Cas. Co., 546 F.
Supp. 543, 546 (D. Colo. 1982).
9. Richards v. Hanover Ins. Co., 299 S.E.2d 561 (Ga. 1983) (holding that
the obligation of insureds was several, not joint. Thus, innocent
co-insured spouse was entitled to coverage if she did not participate in
wrongful conduct); St. Paul Fire & Marine Ins. Co. v. Molloy, 433
A.2d 1135 (Md. 1981) (finding that unless policy language clearly makes
obligations of co-insureds joint, co-insureds may be treated as several,
and innocent co-insured may recover); Samhammer v. Home Mut. Ins.
507 N.Y.S.2d 499, 503 (App. Div. 1986).
10. See, e.g., U.S.F.& G. Ins. v. Brannan, 589 P.2d 817 (Wash. Ct.
App. 1979); see also Reitzner v. State Farm Fire & Cas. Co., 510
N.W.2d 20 (Minn. Ct. App. 1993).
11. The 1943 Standard New York Fire Policy contains 165 numbered lines
of text. Underwriters attached it to property policies, then added
coverages and conditions by endorsement. When "plain language"
policies began to appear, most state legislatures approved the new
policies but required them to be at least as favorable to the insured as
the Standard Policy. For an excellent description of the history of the
issue, see Borman v. State Farm Fire & Cas. Co., 521 N.W.2d 266, 269
12. Watson v. United Servs. Auto. Ass'n, 566 N.W.2d 683 (Minn. 1997);
Fireman's Fund Ins. Co. v. Dean, 441 S.E.2d 436 (Ga. Ct. App. 1994);
Osbon v. National Union Fire Ins. Co., 632 So. 2d 1158 (La. Ct. App.
1994). This is true even when the policy filed has been approved by the
insurance commissioner. Ponder v. Allstate Ins. Co., 729 F. Supp 60, 62
(E.D. Mich. 1990).
Gary Williams, Port Angeles,